Socio economic consequences of food price spikes

High food prices, especially when they have increased suddenly and unexpectedly, have been found to hurt many poor people around the world. The Global Monitoring Report 2012: Food Prices, Nutrition, and the Millennium Development Goals (GMR) finds that the food price shock that peaked in early 2011 pushed nearly 50 million people into poverty. On one level, this is not surprising—the poorest people, after all, spend nearly all of their income on food. But on further reflection, this result is not so obvious— three quarters of the world’s poor are rural and the majority of them depend on farming for their livelihoods. The problem is that—unlike farmers in rich countries—many poor farmers in developing countries don’t produce enough food to meet their families’ needs. These net buyers of food are hurt by higher food prices even though they are farmers.

The GMR considers, among other things, how sharp increases in food prices affect poverty among different types of households. Other things equal, the most adversely affected households are those in urban areas for a very clear reason—these households generally get very little of their income from farming. Most poor farm households are also adversely affected by higher food prices in the short run. However, many of them are able to benefit from sustained higher prices as they increase their output. In the long run, the GMR shows that the poverty rate amongst farm households would fall by almost 10 percentage points with a sustained doubling of world food prices, even though the overall poverty rate would rise by more than 15 percentage points.

Female-headed households appear to be affected more negatively than the average by higher food prices. This arises from two distinct characteristics of female-headed households—they tend to be poorer than average—and hence to spend more of their income on food— and are much less likely to be farmers.

When thinking of the consequences of food price shocks, it is important to bear in mind this heterogeneity. Policies such as export bans that hold down the domestic price of food are a blunt instrument that helps some households while hurting others. Only more targeted policies such as social safety nets and those that assist farmers to increase production and/or to respond more quickly to changing opportunities are able to take this heterogeneity into account and ensure that poor households are not disadvantaged by policies intended to help them.